Accounting Seminar（2018-13）

Topic: Do IPO Firms Classification Shift? Implications for Price Formation and Post-IPO Stock Performance

Speaker: Xiaotao (Kelvin) Liu, Associate Professor of Accounting, D’Amore-McKim School of Business, Northeastern University

Time: Friday, June 29th, 10:00-11:30

Place: Room 217, Guanghua Building 2

Abstract:

Extant earnings management studies in the initial public offering (IPO) context typically focus on accruals management and bottom-line earnings. Departing from this typical focus, this study investigates whether IPO firms inflate “core” earnings through classification shifting (i.e., misclassifying core expenses as income-decreasing special items) immediately prior to IPOs. We provide initial evidence that IPO firms engage in classification shifting in the pre-IPO period. In addition, IPO firms’ accruals management is negatively associated with classification shifting. More importantly, we find that pre-IPO classification shifting influences IPO price formation. That is, pre-IPO classification shifting is positively associated with the price revision from the mid-point of initial price range to the final offer price, but it is not associated with the initial IPO return. Furthermore, we find that pre-IPO classification shifting is followed by negative post-IPO stock returns. Overall, our findings caution investors, auditors, and regulators that classification shifting, a seemingly innocuous accounting maneuver, can mislead investors in their IPO valuation and inflict financial loss.

Introduction:

Professor Xiaotao (Kelvin) Liu joined the D’Amore-McKim School of Business, Northeastern University after he received his Ph.D. in Accounting from the University of South Carolina, Master of Philosophy from City University of Hong Kong and Bachelor of Business Administration in Finance from Peking University. His primary areas of research interest include earnings management, management accounting and corporate governance. He has published in theContemporary Accounting Research,Journal of Business Ethics,Journal of Accounting and EconomicsandReview of Accounting Studies.

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